DST.EDU Series A- Part 5: DST Fees

The expens­es asso­ci­at­ed with a Delaware Statu­to­ry Trust (DST) invest­ment or pur­chase may be viewed as expen­sive.  This may be due to how the fees are charged when the DST is acquired.

Wel­come DST News! Our goal is to pro­vide non-biased edu­ca­tion and mar­ket infor­ma­tion for Accred­it­ed Investors on DSTs. We hope to pro­vide a Depth & Breath of knowl­edge for Investors About Delaware Statu­to­ry Trusts (DSTs).

Updat­ed Post: Jan­u­ary 27, 2024
Orig­i­nal Post Feb 1, 2022

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

Most real estate invest­ments will have three aspects of cost: cost to pur­chase (acqui­si­tion); cost to oper­ate (oper­a­tions); cost to exit or sell the prop­er­ty at the end of own­er­ship (dis­po­si­tion). There is also the ongo­ing cost of hold­ing the prop­er­ty. DST have the same fees.  Addi­tion­al fees in all real estate acqui­si­tions include attor­ney and legal fees, loan cost (if debt is present), and expens­es paid to lender found in both tra­di­tion­al real estate invest­ment and DST.  In typ­i­cal real estate acqui­si­tion, the addi­tion­al fees may be out of pock­et or in addi­tion­al to down pay­ment costs. Typ­i­cal­ly, DST fees are pack­aged with­in the acqui­si­tion and ful­ly dis­closed int he Pri­vate Place­ment Mem­o­ran­dum (PPM). The DST fees may be at first glance very typ­i­cal and then not typ­i­cal. Here are exam­ples:

Sell­ing Com­mis­sions. Most own­ers of com­mer­cial real estate use real estate bro­kers for buy­ing real estate and also sell­ing real estate. This may be viewed as very typ­i­cal. DST invest­ment acqui­si­tions, by indi­vid­ual investors, are han­dled through a licensed third-par­ty group. These are rep­re­sen­ta­tives of Broker/Dealers as well as reg­is­tered rep­re­sen­ta­tives oper­at­ing under a reg­is­tered invest­ment advi­sor (RIA). You must have a secu­ri­ties license and reg­is­tered with either the SEC or FINRA to rep­re­sent the sell­ers (spon­sors) of DSTs. You also need those cre­den­tials when advis­ing an indi­vid­ual investor.

In some cas­es, RIAs may be com­pen­sat­ed from their clients based on assets under man­age­ment, if this occurs then com­mis­sions may be re-allowed to reg­is­tered rep­re­sen­ta­tives that exe­cute sales of DST inter­ests. Real­lowed mean­ing the investor may ben­e­fit from the real­lowance. Real estate bro­kers are not per­mit­ted to par­tic­i­pate in the sale of a DST (unless the indi­vid­ual agents car­ry the nec­es­sary secu­ri­ties license).

There is a dif­fer­ence when you com­pare the com­mis­sion paid on a DST acqui­si­tion to the com­mis­sion paid on a typ­i­cal real estate trans­ac­tion.  On a DST trans­ac­tion the com­mis­sion is only paid on the cash invest­ed in the trans­ac­tion and not on the bor­rowed funds to acquire the prop­er­ty. This is not typ­i­cal when com­par­ing to a tra­di­tion­al real estate trans­ac­tion. In a nor­mal real estate trans­ac­tion where an investor brings $500,000 in cash, obtains a $500,000 loan to pur­chase a $1,000,000 build­ing, the real estate com­mis­sion is paid on the entire amount. That would amount to a $60,000 com­mis­sion (using a hypo­thet­i­cal total list­ing com­mis­sion of 6%). In a DST the com­mis­sion allo­ca­tion would be cal­cu­lat­ed on the cash or equi­ty invest­ed. In this exam­ple $30,000 on a DST pur­chase. The rea­son being the com­mis­sion is only being paid on the $500,000 of cash in the trans­ac­tion.

Typ­i­cal­ly, in real estate offered through real estate bro­kers the list­ing agree­ment spec­i­fies the sell­er pay all the com­mis­sions (sim­ply by adding to the sell­ing price). The com­mis­sion con­ver­sa­tion with any sell­er of real estate may also include the notion that no mat­ter how the deal is struc­tured the buy­er is always pay­ing the com­mis­sion (since it will be added to the accept­able price paid to the sell­er).

Acqui­si­tion fees:   When a builder acquires land and build a prop­er­ty, they would pack­age togeth­er the cost of devel­op­ing the new project includ­ing adding to the hard con­struc­tion cost such as impact fees, con­struc­tion cost, design, per­mit­ting, and oth­er soft cost. There may also be oth­er cost in zon­ing or land use plans. All of these total costs are cov­ered in the offer­ing and pur­chase price. This may be viewed as typ­i­cal fees.

When a spon­sor acquires the under­ly­ing real estate in antic­i­pa­tion of pack­ing as a DST there are costs asso­ci­at­ed with the entire process. The over­all cost of reg­is­ter­ing the offer­ing in the state of Delaware, hir­ing the attor­ney to pro­vide the ini­tial tax opin­ions and let­ters all add to the soft cost. These fees are recov­ered in the DST offer­ing and ful­ly dis­closed in the PPM.  These fees are com­bined with the com­mis­sion and ref­er­enced as the “Load”.  The pack­ag­ing of these fees maybe viewed as not typ­i­cal when com­pared to tra­di­tion­al real estate.  How­ev­er, you may see some sim­i­lar­i­ties in struc­tur­ing any offer­ing.

Look for Part 6: Allowances for Bro­ker Deal­er

DST’s (Delaware Statu­to­ry Trusts) are for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and com­pli­ment your finan­cial objec­tives. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, in any form, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin ‑Sher­wood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.